Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please help to answer the attached question.
Transcribed Image Text:1. What is the role of digital analytics in the long term to increase shareholder wealth? What
are the risks and how are they mitigated?
What can cash dividends achieve but what share repurchase cannot do? Explain
3. PT ABC has assets with a market price of Rp. 112 billion and zero-coupon bonds with a
nominal value of Rp. 100 billion. Risk free rate of 5% / year compounded continuously. The
company has 2 project options that one should choose. The Galaxy project has an NPV of Rp.
12 billion and the Titanium Project has an NPV of Rp. 16 billion. If the company's board of
directors chooses the Galaxy Project, the standard deviation of the company's return on
assets will increase to 48% / year. Conversely, if the company's Board of Directors chose the
Titanium Project, the standard deviation of the company's asset return would drop to 22% /
year. Hint: Use the Black Scholes Model to calculate the value of equity as a European call
option. Firm value consists of the value of existing business plus new business value (present
value of growth opportunities)
Question:
a) What is the value of equity and debt if the Galaxy Project is selected?
b) What is the value of equity and debt if the Titanium Project is selected?
c) If you are the owner of the company, which project will you choose? Explain
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